DOCSLIB.ORG

Interest Income and Expense N Business Context

Total Page：16

File Type：pdf, Size：1020Kb

Download full-text PDF Read full-text
Interest Income and Expense N Business Context NOTE 13 Interest income and expense n Business Context The main source of income and of expense for a will arise on deposits and monetary policy liabilities, central bank is interest revenue. Interest revenue will including compulsory reserves if remunerated. Interest come from both the securities in the foreign reserves may also be paid on foreign currency liabilities, where portfolio, and on domestic assets, such as monetary these exist. policy assets and loans to government. Interest expense ACCOUNTING POLICY– INTEREST INCOME AND EXPENSE a) Interest and similar income and expense For all financial instruments that are measured at amortized cost, or fair value through other comprehensive income, interest income or expense is recorded at the effective interest rate, which is the rate that exactly discounts the estimated future cash receipts or payments through the expected life of the financial instrument or a shorter period, where appropriate, to net carrying amount of the financial asset or financial liability. The calculation takes into account all contractual terms of the financial instrument (for example, prepayment options) and includes any fees or incremental costs that are directly attributable to the instrument and are an integral part of the effective interest rate, but not future credit losses. The carrying amount of the financial asset or financial liability is adjusted if the Bank revises its estimates of payments or receipts. The adjusted carrying amount is calculated based on the original effective interest rate and the change in carrying amount is recorded as interest income or expense. b) Interest income recognition base The original effective interest rate is applied to the gross carrying amount (carrying amount without reduction by expected credit loss allowance) of a financial asset for which: ● credit risk has not increased significantly since initial recognition (stage 1); ● credit risk has increased significantly since initial recognition, but which are not credit-impaired (stage 2). For financial assets which are credit-impaired, the original effective interest rate is applied to the net carrying amount (carrying amount after reduction by expected credit loss allowance). (NBG) Expense arising on financial assets because of a negative effective interest rate is not presented as interest revenue but included with interest as an expense. A Central Bank’s Guide To International Financial Reporting Standards / 97 ©International Monetary Fund. Not for Redistribution DISCLOSURE – INTEREST INCOME AND EXPENSE Interest income from international reserves relates to interest earned from investments in foreign currency securities, money market operations and foreign deposits. While interest income from monetary policy operations relates to interest earned from investments in Utopian Government Securities, but also from open market operations. Negative interest from deposits and current accounts with banks represent charges arising from negative yielding deposits and accounts placed with foreign banks. (BOA) As at December 31 (LC 000) 2019 2018 Interest income from international reserves Cash and cash equivalents 1,933,574 1,759,158 Debt instruments at FVPL 65,000 57,000 Investments measured at FVOCI 288,377 322,355 Interest income from domestic assets Due from resident financial institutions – – Due from government 12,552 7,224 Total interest income 2,299,503 2,145,736 Interest expenses from foreign currency items Due to non-resident financial institutions (519,706) (539,127) Due to International Monetary Fund – – Negative interest from deposits and current accounts with banks – – Interest expense from monetary policy operations – – Debt securities issued (250,000) (260,000) Due to resident financial institutions – – Total interest expense (769,706) (799,127) NET INTEREST INCOME 1,529,797 1,346,609 n User Guidance Disclosures on interest income and expense shall Financial liabilities measured at AC. include information per Financial assets measured at AC. ● financial instruments classification according to IFRS 9; Investments in equity instruments designated at FVOCI in accordance with paragraph 5.7.5 of IFRS 9. ● nature of the instrument and portfolio (foreign reserves or domestic currency). Financial assets measured at FVOCI in accordance with paragraph 4.1.2A of IFRS 9, showing separately the According to IFRS 7.20, central banks shall disclose amount of gain or loss recognised in OCI during the interest income and expense either in the statement of period and the amount reclassified upon derecognition comprehensive income or in the notes: from accumulated OCI to profit or loss for the period; (a) net gains or net losses on: and Financial assets or financial liabilities measured at (b) Total interest revenue and total interest expense FVPL. For financial liabilities designated as at FVPL, (calculated using the effective interest method) for separately the amount of gain or loss recognized in OCI financial assets that are measured at AC or that are and the amount recognized in profit or loss. measured at FVOCI in accordance with paragraph 4.1.2A of IFRS 9 (showing these amounts separately). A Central Bank’s Guide To International Financial Reporting Standards / 98 ©International Monetary Fund. Not for Redistribution Optional information to be provided regarding the levels of interest rates earned per instrument or interest rates on monetary policy instruments either in the Interest revenue/expense note or in the related note. Central banks may also experience negative interest rates both from the assets (e.g. negative yields for financial instruments) and liabilities side (e.g. negative remuneration for obligatory reserve requirements). According to Interpretations Committee Agenda Decision in January 2015, interest resulting from a negative effective interest rate on a financial asset does not meet the definition of interest revenue. Consequently, the expense arising on a financial asset because of a negative effective interest rate should not be presented as interest revenue, but in an appropriate expense classification. Same logic applies for the liabilities side. (Interpretations Committee agenda decision of January 2015) See the statement from the Interpretations Committee— Income and expenses arising on financial instruments with a negative yield—presentation in the statement of comprehensive income (IAS 39 Financial Instruments: Recognition and Measurement and IAS 1 Presentation of Financial Statements)—January 2015 A Central Bank’s Guide To International Financial Reporting Standards / 99 ©International Monetary Fund. Not for Redistribution.
Load more

Recommended publications
  • 3.5 FINANCIAL ASSETS and LIABILITIES Definitions 1. Financial Assets Include Cash, Equity Instruments of Other Entities
    128 SU 3: Financial Accounting I 3.5 FINANCIAL ASSETS AND LIABILITIES Definitions 1. Financial assets include cash, equity instruments of other entities (e.g., preference shares), contract rights to receive cash or other financial assets from other entities (e.g., accounts receivable), etc. 2. Financial liabilities include obligations to deliver cash or another financial asset (e.g., bonds or accounts payable), obligations to exchange financial instruments under potentially unfavorable conditions (e.g., written options), etc. Initial Recognition 3. A financial asset or liability is initially recognized only when the entity is a party to the contract. Thus, contract rights and obligations under derivatives are recognized as assets and liabilities, respectively. a. A firm commitment to buy or sell goods or services ordinarily does not result in recognition until at least one party has performed. 1) However, certain contracts to buy or sell a nonfinancial item may result in recognition of an asset or liability. a) For example, a firm commitment to buy a commodity in the future that (1) can be settled in cash and (2) is not held for the purpose of receiving the commodity is treated as a financial instrument. Accordingly, its net fair value is recognized at the commitment date. b) If an unrecognized firm commitment is hedged in a fair value hedge,a change in its net fair value related to the hedged risk is recognized as an asset or liability. 4. An issuer of a financial guarantee initially recognizes a liability and measures it at fair value. Subsequent measurement is at the greater of (a) the amount based on accounting for provisions or (b) the amortized amount.
    [Show full text]
  • ARC Financial Instrument General Requirements
    ARC Financial Instrument General Requirements Each applicant must provide a Financial Instrument in the required form and amount to obtain and maintain ARC accreditation. The Financial Instrument serves as, among other things, a guarantee for the financial transactions issued under your ARC number. What forms of coverage are acceptable? There are three acceptable types: 1. Bond Request a performance or financial guarantee bond type from a surety. The ARC bond form is found at https://www2.arccorp.com/globalassets/forms/aas/306ins.pdf. 2. Irrevocable Letter of Credit (LOC) Guarantee of payment issued by a federally insured bank, credit union or other lending institution acceptable to ARC. The ARC LOC form is found at https://www2.arccorp.com/globalassets/forms/aas/inst308.pdf. 3. ARC Cash Security Deposit (CSD) A cash deposit made directly to ARC as an alternative to a bond or letter of credit. The CSD Agreement is found at https://www2.arccorp.com/globalassets/forms/aas/form309.pdf . Required Amount for New Applicants & Type 5 Ownership Changes Applicants New Applicants $20,000.00 is the minimum amount of coverage that must be provided by each Agent and CTD applicant. (collectively referred to here as “Agent”) This amount will remain in effect for two years from the date of approval of the application unless the amount is required to be higher as provided in the Agent Reporting Agreement*. ( *Unless otherwise stated in this summary, the terms “Agent” and “Agent Reporting Agreement” (“ARA”) also include Corporate Travel Department (CTD) and Corporate Travel Department Reporting Agreement. (CTDRA).) After two years, the amount may be reduced to $10,000.00, unless a higher amount is required by the terms of the ARA.
    [Show full text]
  • IFRS 9, Financial Instruments Understanding the Basics Introduction
    www.pwc.com/ifrs9 IFRS 9, Financial Instruments Understanding the basics Introduction Revenue isn’t the only new IFRS to worry about for 2018—there is IFRS 9, Financial Instruments, to consider as well. Contrary to widespread belief, IFRS 9 affects more than just financial institutions. Any entity could have significant changes to its financial reporting as the result of this standard. That is certain to be the case for those with long-term loans, equity investments, or any non- vanilla financial assets. It might even be the case for those only holding short- term receivables. It all depends. Possible consequences of IFRS 9 include: • More income statement volatility. IFRS 9 raises the risk that more assets will have to be measured at fair value with changes in fair value recognized in profit and loss as they arise. • Earlier recognition of impairment losses on receivables and loans, including trade receivables. Entities will have to start providing for possible future credit losses in the very first reporting period a loan goes on the books – even if it is highly likely that the asset will be fully collectible. • Significant new disclosure requirements—the more significantly impacted may need new systems and processes to collect the necessary data. IFRS 9 also includes significant new hedging requirements, which we address in a separate publication – Practical guide – General hedge accounting. With careful planning, the changes that IFRS 9 introduces might provide a great opportunity for balance sheet optimization, or enhanced efficiency of the reporting process and cost savings. Left too long, they could lead to some nasty surprises.
    [Show full text]
  • Accounting & Reporting of Financial Instruments 2016
    Accounting & Reporting of Financial Instruments 2016 Illustration 1 (Exchange of Financial Liability at Unfavorable terms) A company borrowed `50 lacs @ 12% p.a. Tenure of the loan is 10 years. Interest is payable every year and the principal is repayable at the end of 10th year. The company defaulted in payment of interest for the year 4, 5 and 6. A loan reschedule agreement took place at the end of 7 year. As per the agreement the company is required to pay `90 lacs at the end of 8th year. Calculate the additional amount to be paid on account of rescheduling and also the book value of loan at the end of 8th year when reschedule agreement took place. Solution Assumption: Interest is compounded in case of default. Outstanding Amount at the end of 8th year = `50,00,000 x 1.12 x 1.12 x 1.12 x 1.12 x 1.12 = `88,11,708 (i.e. adding interest for 4th to 8th year) Rescheduled amount to be paid at the end of the 8th year = `90,00,000 Additional amount to be paid on rescheduling = `90,00,000 - `88,11,708 = `1,88,292. Illustration 2 Entity A holds an option to purchase equity shares in a listed entity B for `100 per share at the end of a 90 day period. Evaluate the contract whether a financial asset or a financial liability? What if the entity A has written the option? Solution The above call option gives entity A, a contractual right to exchange cash of `100 for an equity share in another entity and will be exercised if the market value of the share exceeds `100 at the end of the 90 day period.
    [Show full text]
  • Credit Default Swap in a Financial Portfolio: Angel Or Devil?
    Credit Default Swap in a financial portfolio: angel or devil? A study of the diversification effect of CDS during 2005-2010 Authors: Aliaksandra Vashkevich Hu DongWei Supervisor: Catherine Lions Student Umeå School of Business Spring semester 2010 Master thesis, one-year, 15 hp ACKNOWLEDGEMENT We would like to express our deep gratitude and appreciation to our supervisor Catherine Lions. Your valuable guidance and suggestions have helped us enormously in finalizing this thesis. We would also like to thank Rene Wiedner from Thomson Reuters who provided us with an access to Reuters 3000 Xtra database without which we would not be able to conduct this research. Furthermore, we would like to thank our families for all the love, support and understanding they gave us during the time of writing this thesis. Aliaksandra Vashkevich……………………………………………………Hu Dong Wei Umeå, May 2010 ii SUMMARY Credit derivative market has experienced an exponential growth during the last 10 years with credit default swap (CDS) as an undoubted leader within this group. CDS contract is a bilateral agreement where the seller of the financial instrument provides the buyer the right to get reimbursed in case of the default in exchange for a continuous payment expressed as a CDS spread multiplied by the notional amount of the underlying debt. Originally invented to transfer the credit risk from the risk-averse investor to that one who is more prone to take on an additional risk, recently the instrument has been actively employed by the speculators betting on the financial health of the underlying obligation. It is believed that CDS contributed to the recent turmoil on financial markets and served as a weapon of mass destruction exaggerating the systematic risk.
    [Show full text]
  • Capital Market Instruments 15
    CAPITAL MARKET 2 INSTRUMENTS CHAPTER Question 1] What do you understand by the term ‘capital market’? Ans.: Capital Market is a market for financial investments that are direct or indirect claims to capital. It is wider than the securities market and embraces all forms of lending and borrowing. It is a market, where business enterprises and governments can raise long-term funds. Capital market is wider term and includes security market. Security market is market where equity shares, preference shares, debentures and bonds are traded. Security market has following two segments: (a) Primary Market : Primary market is that part of the capital markets that deals with the issuance of new securities. Companies, governments or public sector institutions can obtain funding through the sale of a new shares or bond issue. The primary market is the market where the securities are sold for the first time. Therefore it is also called the New Issue Market (NIM). The issue of securities by companies can take place in any of the following methods: - Initial public offer ® - Further issue of capital - Rights issue TAXMANN - Firm allotment - Offer to public - Bonus issue (b) Secondary Market : The secondary market, also known as the aftermarket, is the financial market where previously issued securities and financial instruments such as stock, bonds, options, and futures are bought and sold. The stock market or secondary market ensures free marketability, negotiability and price discharge. Secondary market has further two components: u Spot Market : Where securities are traded for immediate delivery and payment. u Futures Market : Where the securities are traded for future delivery and payment.
    [Show full text]
  • Derivative Securities
    2. DERIVATIVE SECURITIES Objectives: After reading this chapter, you will 1. Understand the reason for trading options. 2. Know the basic terminology of options. 2.1 Derivative Securities A derivative security is a financial instrument whose value depends upon the value of another asset. The main types of derivatives are futures, forwards, options, and swaps. An example of a derivative security is a convertible bond. Such a bond, at the discretion of the bondholder, may be converted into a fixed number of shares of the stock of the issuing corporation. The value of a convertible bond depends upon the value of the underlying stock, and thus, it is a derivative security. An investor would like to buy such a bond because he can make money if the stock market rises. The stock price, and hence the bond value, will rise. If the stock market falls, he can still make money by earning interest on the convertible bond. Another derivative security is a forward contract. Suppose you have decided to buy an ounce of gold for investment purposes. The price of gold for immediate delivery is, say, $345 an ounce. You would like to hold this gold for a year and then sell it at the prevailing rates. One possibility is to pay $345 to a seller and get immediate physical possession of the gold, hold it for a year, and then sell it. If the price of gold a year from now is $370 an ounce, you have clearly made a profit of $25. That is not the only way to invest in gold.
    [Show full text]
  • Frs139-Guide.Pdf
    The KPMG Guide: FRS 139, Financial Instruments: Recognition and Measurement i Contents Introduction 1 Executive summary 2 1. Scope of FRS 139 1.1 Financial instruments outside the scope of FRS 139 3 1.2 Definitions 3 2. Classifications and their accounting treatments 2.1 Designation on initial recognition and subsequently 5 2.2 Accounting treatments applicable to each class 5 2.3 Financial instruments at “fair value through profit or loss” 5 2.4 “Held to maturity” investments 6 2.5 “Loans and receivables” 7 2.6 “Available for sale” 8 3. Other recognition and measurement issues 3.1 Initial recognition 9 3.2 Fair value 9 3.3 Impairment of financial assets 10 4. Derecognition 4.1 Derecognition of financial assets 11 4.2 Transfer of a financial asset 11 4.3 Evaluation of risks and rewards 12 4.4 Derecognition of financial liabilities 13 5. Embedded derivatives 5.1 When to separate embedded derivatives from host contracts 14 5.2 Foreign currency embedded derivatives 15 5.3 Accounting for separable embedded derivatives 16 5.4 Accounting for more than one embedded derivative 16 6. Hedge accounting 17 7. Transitional provisions 19 8. Action to be taken in the first year of adoption 20 Appendices 1: Accounting treatment required for financial instruments under their required or chosen classification 21 2: Derecognition of a financial asset 24 3: Financial Reporting Standards and accounting pronouncements 25 1 The KPMG Guide: FRS 139, Financial Instruments: Recognition and Measurement Introduction This KPMG Guide introduces the requirements of the new FRS 139, Financial Instruments: Recognition and Measurement.
    [Show full text]
  • Interpretive Guidance on Financial Instruments March 2018 Financial Instruments
    Life Sciences Accounting and Financial Reporting Update — Interpretive Guidance on Financial Instruments March 2018 Financial Instruments Introduction Drug development is challenging, complex, time-consuming and costly. Every year, billions of dollars are spent developing new drugs, with some studies showing that the cost of bringing an asset to market increased to record levels in 2017.1 To fund the cost of drug development, life sciences entities frequently seek external financing. Many of the financing transactions include complex terms and conditions that require a careful accounting analysis. The SEC staff historically has focused on the classification of liabilities and equity in the balance sheet when equity instruments have redemption provisions or financial instruments possess characteristics of both liabilities and equity. For example, classification of convertible debt instruments and freestanding warrants is often scrutinized since they may contain both liability and equity components under U.S. GAAP. In addition, prospective SEC registrants in the life sciences industry may have previously outstanding instruments with characteristics of both liabilities and equity at the time they are approaching a potential initial public offering (IPO), or life sciences entities may issue new instruments in connection with a potential IPO. Even if certain instruments are already outstanding before an IPO, it may be appropriate for an instrument to be classified outside of permanent equity in accordance with SEC rules when public financial statements are initially filed. Further, for a life sciences entity that becomes a public company, there can be other accounting consequences that did not exist while the entity was private. Industry Issues The discussion below highlights guidance on the accounting for financial instruments that frequently affects life sciences entities.
    [Show full text]
  • Financial Derivatives Classification of Derivatives
    FINANCIAL DERIVATIVES A derivative is a financial instrument or contract that derives its value from an underlying asset. The buyer agrees to purchase the asset on a specific date at a specific price. Derivatives are often used for commodities, such as oil, gasoline, or gold. Another asset class is currencies, often the U.S. dollar. There are derivatives based on stocks or bonds. The most common underlying assets include stocks, bonds, commodities, currencies, interest rates and market indexes. The contract's seller doesn't have to own the underlying asset. He can fulfill the contract by giving the buyer enough money to buy the asset at the prevailing price. He can also give the buyer another derivative contract that offsets the value of the first. This makes derivatives much easier to trade than the asset itself. According to the Securities Contract Regulation Act, 1956 the term ‘Derivative’ includes: i. a security derived from a debt instrument, share, loan, whether secured or unsecured, risk instrument or contract for differences or any other form of security. ii. a contract which derives its value from the prices or index of prices, of underlying securities. CLASSIFICATION OF DERIVATIVES Derivatives can be classified into broad categories depending upon the type of underlying asset, the nature of derivative contract or the trading of derivative contract. 1. Commodity derivative and Financial derivative In commodity derivatives, the underlying asset is a commodity, such as cotton, gold, copper, wheat, or spices. Commodity derivatives were originally designed to protect farmers from the risk of under- or overproduction of crops. Commodity derivatives are investment tools that allow investors to profit from certain commodities without possessing them.
    [Show full text]
  • Derivative Instruments and Hedging Activities
    www.pwc.com 2015 Derivative instruments and hedging activities www.pwc.com Derivative instruments and hedging activities 2013 Second edition, July 2015 Copyright © 2013-2015 PricewaterhouseCoopers LLP, a Delaware limited liability partnership. All rights reserved. PwC refers to the United States member firm, and may sometimes refer to the PwC network. Each member firm is a separate legal entity. Please see www.pwc.com/structure for further details. This publication has been prepared for general information on matters of interest only, and does not constitute professional advice on facts and circumstances specific to any person or entity. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is given as to the accuracy or completeness of the information contained in this publication. The information contained in this material was not intended or written to be used, and cannot be used, for purposes of avoiding penalties or sanctions imposed by any government or other regulatory body. PricewaterhouseCoopers LLP, its members, employees and agents shall not be responsible for any loss sustained by any person or entity who relies on this publication. The content of this publication is based on information available as of March 31, 2013. Accordingly, certain aspects of this publication may be superseded as new guidance or interpretations emerge. Financial statement preparers and other users of this publication are therefore cautioned to stay abreast of and carefully evaluate subsequent authoritative and interpretative guidance that is issued. This publication has been updated to reflect new and updated authoritative and interpretative guidance since the 2012 edition.
    [Show full text]
  • Volcker Rule
    January 27, 2014 Volcker Rule U.S. Agencies Approve Final Volcker Rule, Detailing Prohibitions and Compliance Regimes Applicable to Banking Entities Worldwide EXECUTIVE SUMMARY On December 10, 2013, the Board of Governors of the Federal Reserve System (the “Federal Reserve”), the Office of the Comptroller of the Currency (the “OCC”), the Federal Deposit Insurance Corporation (the “FDIC”), the Securities and Exchange Commission (the “SEC”) and the Commodity Futures Trading Commission (the “CFTC” and, together, the “Agencies”) approved a final rule (the “Final Rule”) implementing Section 619 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”), commonly referred to as the “Volcker Rule.” The Volcker Rule—one of the centerpieces of the Dodd-Frank Act—imposes broad prohibitions and restrictions on proprietary trading and investing in or sponsoring hedge funds or private equity funds by banking organizations and their affiliates. As originally released (prior to publication in the Federal Register), the Final Rule and the detailed “Supplementary Information,” which is critical to understanding and interpreting the Final Rule, were more than 950 pages in total and included more than 2,800 footnotes. In general, although many of the most unclear or troublesome provisions of the Agencies’ proposed rule (the “Proposed Rule”) have been addressed, there remain numerous interpretive issues and implementation challenges. The Final Rule is a sweeping regulation, with broad extraterritorial application, that will fundamentally shape how banking organizations do business. Although the Volcker Rule was principally directed at restricting the activities of certain large banking organizations, its restrictions apply to all banking organizations regardless of size, with limited accommodations for smaller banking organizations in the form of a simplified compliance program.
    [Show full text]